The debt level in Reliance Industries (RIL), country's largest company by market capitalisation, has been rising at a time the oil-to-telecom conglomerate requires additional capital to expand its telecom and retail businesses. Debt worries demand attention as there has also been a consistent fall in company's refining margins. Besides, the company's hydrocarbon exploration and production (E&P) business (both in Krishna-Godavari basin and the US where it has shale gas assets) is bleeding heavily with losses -- an earnings loss of nearly Rs 3,000 crore in last two financial years. Analysts point out RIL will have to immediately fix the leakages.
RIL has an outstanding debt of Rs 2,87,505 crore and it grew by Rs 69,000 crore in financial year 2019 because of its investments in Reliance Jio. The only respite is the company has cash reserves worth Rs 133,027 crore on its books. RIL would have invested around Rs 3 lakh crore towards Reliance Jio so far and spent another Rs 1 lakh crore to expand petrochemicals business in Jamnagar, Gujarat.
Analysts point out the margin from Jio is not enough to recover these investments in the near future. In fact, just before the RIL's result announcement for the March quarter (Q4) of FY19, JP Morgan cut its FY19-21 earnings per share (EPS) estimates by 2-5 per cent. It said that weakness in the core cash-generating energy business could limit the upside. "On balance, we see earnings risks to the downside from here (primarily from refining and Petchem)..."
Jio's strong growth is not large enough to offset weakness in core business, it added. "We build in nearly 150 million subscriber-addition over the next 18 months and modest increases in ARPUs. While there has not been any service revenue model that we have yet seen, in our view, this is a key upside risk."
Jio's earnings before interest, tax, depreciation and amortisation (EBITDA) stood at Rs 15,102 crore in FY19, compared to Rs 6,734 crore in FY18. It is a sharp vault but the EBITDA margin has not changed much -- 38.9 per cent in FY19 versus 33.4 per cent in FY18. Reliance Jio has been able to build up a customer base of 306.7 million, which is close to that of Bharti Airtel, but Jio's net profit stood at Rs 2,964 crore in FY19 (compared to Rs 723 crore in FY18). This explains that it is still a long road to recover investments.
With this in mind, Jio has transferred control of its fibre and tower arms to two infrastructure investment trusts (InvITs) - Digital Fibre Infrastructure Trust and Tower Infrastructure Trust -- set up by a wholly-owned unit of RIL for deleveraging the balance sheet. According to the company, the transfer of assets reduced the liability of Reliance Jio Infocomm (RJI) by Rs 1,07,000 crore. In addition, RJI issued preference share to the parent RIL to raise Rs 78,000 crore. Jio also needs capital for expanding its digital ecosystem through acquisition of start-ups and small digital companies.
Recently, Credit Suisse pointed out that investors do not expect near term listing of Jio or retail divisions this year as both business are still not in steady state.
It is in this situation that RIL's reported stake sale talks with Saudi Aramco make sense. RIL has declined to comment on reports that the company is in talks with Saudi Aramco to sell 25 per cent in its refining and petrochemical business but stated that the conglomerate evaluates opportunities on an ongoing basis. The company sold 30 per cent stake in all of its hydrocarbon assets to British giant BP Plc for $7-billion in 2011 when the production started depleting.
The refining margin (Gross Refining Margin or GRM) of RIL has fallen to $8.2 a barrel in Q4FY19, registering a slip for the sixth straight quarter. The segment EBIT of refining business fell by 19.8 per cent to Rs 19,868 crore in FY19. After Rs 1 lakh crore capital expenditure, the petrochemicals business has also witnessed a quarter-on-quarter fall in EBIT-- Rs 7,975 in Q4FY19 versus Rs 8,221 crore in Q3FY19.
However, the petrochemicals business has become the largest EBIT generating vertical in RIL for the first time. The EBIT increased to Rs 32,173 crore, up by 51.9 per cent, in the last financial year. The retail business is also doing well for RIL. The annual revenue increased by 88.7 per cent to Rs 1,30,566 crore and EBIT by 168.7 per cent to Rs 5,546 crore. The media reported that Reliance Retail is in talks to buy a controlling stake in iconic UK-based toymaker Hamleys for up to Rs 350 crore
Meanwhile, RIL has acquired stakes in about 20 start-ups and in half-a-dozen small firms over the past 24 months. The acquisitions have become a necessity, especially after Jio was launched. RIL targets to create a bouquet of digital products, which can counter the likes of Google, Amazon and Netflix. The acquisitions will become another cost but may not be significant considering its cash flow. RIL's profit increased by 13.1 per cent to Rs 39,588 crore in FY19 on a revenue of Rs 6,22,809 crore, up by 44.6 per cent.